Dear All,
On December 13, 2017, the Financial Reporting Standards Council approved the Philippine Financial Reporting Standards for Small Entities. This applies to small entities as defined in the Philippine Securities and Exchange Commission.
This Framework allows small entities to comply with financial reporting requirements without undue cost or burden effective for annual periods beginning on or after January 1, 2019. Early application is permitted.
Below are some of the key simplifications introduced by the Framework:
| PFRS for Small Entities | PFRS for SMEs |
|---|---|
| Inventories are to be subsequently valued at the lower of cost and market value (i.e. the probable selling price to willing buyers as of reporting date). | Inventories shall be measured at the lower of cost and estimated selling price less costs to complete and sell. (Section 13, Inventories) |
| Investment properties can be carried either at cost or at fair value, depending on the policy choice made by the entity. | Investment properties whose fair value can be measured reliably at each reporting date shall be measured at fair value. (Section 16, Investment Property) If the fair value cannot be measured reliably without undue cost or effort, investment properties can be measured using the cost model. (Section 17, Property, Plant and Equipment) |
| There is no concept of “finance lease” under the Framework. All lease receipts (payments) are recognized as income (expense) as earned (incurred). | The Standard classifies leases as either an operating lease or a finance lease depends on the substance of the transactions instead of the form of the contract. (Section 20, Leases) |
| There is no accounting for onerous contracts under the Framework. | An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits to be received under it. If an entity has a contract that is onerous, the entity recognises and measure the present obligation under the contract as a provision. (Section 21, Provisions and Contingencies) |
| For equity-settled share-based payment transactions, an entity shall measure the goods or services received, and the corresponding increase in equity, with reference to the net asset value of the equity instruments granted. Net asset value is derived by dividing the total assets of the entity less any liabilities, by the number of shares outstanding at measurement date. | For equity-settled share-based payment transactions, an entity shall measure the goods or services received, and the corresponding increase in equity, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity shall measure their value, and the corresponding increase in equity, by reference to the fair value of the equity instruments granted. (Section 26, Share-based Payment) |
| For defined benefit plans, an entity is required to use the accrual approach in calculating benefit obligations in accordance with Republic Act (RA) 7641, The Philippine Retirement Pay Law, or company policy (if superior than RA 7641). Accrual approach is applied by calculating the expected liability as of reporting date using the current salary of the entitled employees and the employees’ years of service, without consideration of future changes in salary rates and service periods. | If an entity is able, without undue cost or effort, to use the projected unit credit method to measure its defined benefit obligation and the related expense, it shall do so. If defined benefits are based on future salaries, the projected unit credit method requires an entity to measure its defined benefit obligations on a basis that reflects estimated future salary increases. (Section 28, Employee Benefits) |
| Entities are given a policy choice of not recognizing deferred taxes in the financial statements. | An entity shall recognise a deferred tax asset or liability for tax recoverable or payable in future periods as a result of past transactions or events. (Section 29, Income Tax) |
| Biological assets can be carried either at cost or at current market price, depending on the policy choice made by the entity. | Biological assets whose fair value can be reliably measured without undue cost or effort shall be carried at fair value less costs to sell with changes in fair value recognized in profit or loss. Whereas, those whose fair value is not readily determinable without undue cost or effort shall be measured at cost less any accumulated depreciation and any accumulated impairment losses. (Section 34, Specialized Activities) |
| Prior period adjustments are just captured in the opening balance of the current year, but with appropriate disclosures. | To the extent practicable, an entity shall correct a material prior period error retrospectively in the first financial statements authorized for issue after its discovery by: (a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or (b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. |
For a copy of the preface for PFRS for Small Entities, please see attached.